What CFPB gained, lost in appeals court ruling

A federal appeals court handed a major victory — and a significant defeat — to the Consumer Financial Protection Bureau by upholding its constitutional structure while also slapping down the agency's practice of making new interpretations of law through enforcement actions.

The results were similarly mixed for other key players. On the one hand, the ruling, which says the president can only fire a CFPB director for cause, will allow any appointee of President Trump to survive into the next administration should the president not win reelection. Yet it also prevents the president from having greater control over the CFPB once a new chief is installed.

Democrats, too, both win and lose. They praised the decision as a victory because it leaves more power with the independent CFPB. But the ruling may stop a future Democratic president from retaking control of the CFPB swiftly after the election.

"I take great solace in the fact that Mick Mulvaney can use his unchecked, unilateral powers to continue the agency’s transformation," said House Financial Services Committee Chairman Jeb Hensarling.
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"It's a victory for the CFPB in the long-long run, but the Democrats may have to wait two or three years to replace a Trump nominee," said Eric Mogilnicki, a partner at Covington & Burling. "I do think that the win on independence is not necessarily a win for those who are guarding the mission of the CFPB because it means someone who is dubious of the bureau may be in charge for the next five years."

At issue is the 8-3 decision by the U.S. Court of Appeals for the D.C. Circuit that found the CFPB's structure was constitutional, striking down an earlier ruling that said a president should be able to fire a director at will.

"Congress’s decision to provide the CFPB Director a degree of insulation reflects its permissible judgment that civil regulation of consumer financial protection should be kept one step removed from political winds and presidential will," the court ruled in a 250-page decision. "We have no warrant here to invalidate such a time-tested course. No relevant consideration gives us reason to doubt the constitutionality of the independent CFPB’s single-member structure."

The court cited examples of other federal financial regulators that Congress deemed to be independent, including the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, and the Securities and Exchange Commission.

But the decision, while affirming the CFPB's independence, did not let the agency off the hook entirely. PHH, a nonbank mortgage lender and servicer, had appealed a 2014 decision by then CFPB Director Richard Cordray, who imposed a $109 million penalty against the Mount Laurel, N.J. company, for allegedly taking illegal kickbacks for mortgage referrals.

The court said Cordray erred in redefining the Real Estate Settlement Procedures Act to take action against PHH, an issue that had been largely overlooked by the case's more controversial constitutional issues.

The court said the CFPB had violated due process by not providing PHH with notice of its new interpretation of Respa. It also ruled that the CFPB is subject to the three-year statute of limitations in administrative cases.

"This is a complete victory for PHH and the mortgage industry," said Mitch Kider, chairman and managing partner at Weiner Brodsky Kider, and a litigator for PHH. "The court has clearly said that lenders can do business with someone that may be referring business to them as long as they are paying a reasonable, fair market value for the services rendered."

Acting CFPB Director Mick Mulvaney now must determine whether the premiums that PHH paid to a reinsurer were reasonable. Cordray had thrown out an initial $6.4 million judgment by an administrative law judge, setting the stage for PHH to sue the CFPB claiming it was unconstitutional.

House Financial Services Committee Chairman Jeb Hensarling, R-Tex., called for an appeal to the Supreme Court, though it was unclear whether PHH or the Justice Department would challenge the ruling.

“I am deeply disappointed with the court’s decision and hope the Supreme Court will review the ruling in short order," Hensarling said in a press release. "I take great solace in the fact that Mick Mulvaney can use his unchecked, unilateral powers to continue the agency’s transformation into one that will, as he said, 'exercise [its] statutory authority to enforce the laws of this nation….execute the statutory mandate of the bureau to protect consumers’ and go no further.'"

Hensarling also said he stands "ready to work with Democrats to reform the CFPB," even as industry groups called for the bureau to be restructured as a five-member commission.

“While the court ruled the CFPB’s governing structure was not unconstitutional, it does not mean the current structure is appropriate for the bureau’s long-term credibility," said Richard Hunt, president and CEO of the Consumer Bankers Association. “Congress should create a bipartisan commission at the CFPB, in place of a sole director, to uphold the bureau’s mission of consumer protection."

That did not seem likely. Democrats and consumer groups hailed the ruling as upholding the CFPB independence's and called for Trump to nominate a permanent director.

"While this is good news for consumers, the CFPB cannot be fully independent until it has a lawfully appointed leader in place," said Sen. Sherrod Brown, D-Ohio, the ranking member of the Senate Banking Committee. "This administration should quickly nominate a director with bipartisan support and a track record of holding Wall Street accountable.”

Others suggested the decision could impact a separate case challenging Mulvaney's leadership, putting the Justice Department in a bind as to whether it should appeal the PHH case.

Last week, the U.S. Court of Appeals for the District of Columbia granted an expedited appeal to Leandra English, the bureau's deputy director, who Cordray named to succeed him when he resigned in November, citing statutory language in the Dodd-Frank Act.

Trump appointed Mulvaney as acting director of the CFPB on the same day, citing his authority under the Federal Vacancies Reform Act. English then sued Trump and Mulvaney, claiming she was the legal interim director.

A district court judge denied granting English a temporary restraining order in December against Mulvaney, and she appealed.

"The fact that there is a separate appeal on an expedited schedule makes it difficult for Mulvaney [or the DOJ] to appeal to the Supreme Court without jeopardizing his credibility in the Leandra English case," said Jennifer Lee, a partner at Dorsey & Whitney.

Many hailed the decision specifically for upholding the mortgage industry's interpretation of Respa.

Had the court ruled against PHH, all sorts of insurance arrangements would have been considered illegal and could have required that other mortgage lenders repay alleged kickbacks related to premiums back to consumers, Kider said.

"This is a positive for PHH Corp., as the reinstatement of the appeals court decision should dramatically reduce – if not completely eliminate – the company's enforcement liability for mortgage reinsurance deals," wrote Jaret Seiberg, an analyst at Cowen Washington Research Group. "This also provides the Trump CFPB with political cover to settle or drop existing Respa investigations on the grounds that the agency did not properly spell out ahead of time whether the activity in question would violate the law."

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Sixty years ago I conducted an audit of a small loan company in SC. An account for $84 to an African-American customer had ballooned ten times through "flipping" (adding extra fees, etc., while talking the customer into accepting an extra $20 as often as possible.
That's what CFPB was trying to regulate, keeping the poor from being
"hood-winked" ... for the almighty dollar. Pay Day lending is no different. Even the big boys know how to do it. Glad there is a "hell".